BANCO DEL AUSTRO,S A v. REGAL PROSPER TRADING LTD AND OTHERS

HCA 477/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 477 OF 2015

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D E C I S I O N
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1.  This is the hearing of a summons issued by the 10^th defendant on 4 November 2015 under Order 21 rule 3 of the Rules of the High Court for an order to vary the Mareva injunction granted against it on 27 May 2015 (as continued on 19 June 2015) and to have the action be discontinued against it. The only basis relies upon by the 10^th defendant is that there was a binding settlement agreement which, it is said, has the effect of compromising all the claims made by the plaintiff against the 10^th defendant in this action.

Background

2.  The plaintiff claims that it is the victim of a cyber fraud in that without its knowledge or approval, an aggregate amount of US$9,139,472.07 was transferred from its bank accounts in the United States to the bank accounts of the 1^st, 2^nd and 4^th defendants in Hong Kong.  This led to the plaintiff commencing this action against the 1^st to 4^th defendants and obtaining an ex parte Mareva injunction against them together with a Norwich Pharmacal order against the banks on 5 March 2015.

3.  From the information provided by the banks, the plaintiff came to know that between 14 January 2015 and 23 January 2015, the 1^st, 2^nd and 4^th defendants transferred an aggregate amount of US$3,102,853 to the 5^th to 23^rd defendants.  On 27 May 2015, the plaintiff obtained an ex parte Mareva injunction against the 5^th to 23^rd defendants up to the amounts received by them.  In the case of the 10^th defendant, the plaintiff claims restitution of US$269,500, which was the amount transferred from the 1^st defendant to the 10^th defendant and the limit of the Mareva injunction granted against it (“Injunction”).

4.  From 3 August 2015, the plaintiff and the 10^th defendant through their solicitors engaged in without prejudice negotiations on the terms of settling the plaintiff’s claim in this action. 

5.  The 10^th defendant contends that by a letter dated 20 August 2015 marked “without prejudice save as to costs” and “subject to contract” (“20/8/2015 Letter”), the plaintiff through its solicitors, Squire Patton Boggs (“SPB”), made an offer to settle this action as against the 10^th defendant in the following terms:

“… we are instructed that as a gesture of goodwill and a final attempt to settle this matter amicably, on a without admission of liability basis, our client is prepared to accept a global settlement sum of US$134,750.00 (i.e. 50% of US$269,500) in full and final settlement of HCA 477 of 2015 as between the Plaintiff and the 10^th Defendant. Please take instructions from your client and confirm by 5:00pm on Wednesday 26 August 2015 if the above settlement offer is agreed, failing which it will automatically lapse.” (emphasis added)

6.  According to Mr Cheng Man Sum, a solicitor of Mike So, Joseph Lau & Co (“MSJL”), prior to receiving the 20/8/2015 Letter, he had a telephone conversation with Ms Camille Leung of SPB in which Ms Leung said that the plaintiff’s offer for global settlement would include costs, that is, each party would bear its own costs.  This is accepted by Ms Leung in §10 of her 10^th affirmation.

7.  It is the 10^th defendant’s case that by an open letter dated 25 August 2015 issued by MSJL to SPB (“25/8/2015 Letter”), it accepted the plaintiff’s offer as follows:

“We write to inform that, on without admission of liability basis, the 10^th Defendant accepts your settlement offer. Please let us have the necessary documents implementing the settlement for our approval.” (emphasis added)

8.  On the basis of the above Letters, the 10^th defendant contends that a settlement agreement on the terms stated in the 20/8/2015 Letter (“Settlement Agreement”) was reached.  This, says the 10^th defendant, bars the plaintiff’s right to proceed further with the action against it.

9.  Subsequently, on 31 August 2015, SPB sent a “without prejudice save as to costs” and “subject to contract” letter to MSJL, enclosing a draft settlement agreement (“draft agreement”) for their consideration and comments.  The draft agreement contains, inter alia, the following provisions:

(1) Recital (D) states that: “The Parties have agreed terms for the full and final settlement of the Proceedings and wish to record those terms of settlement, on a binding basis, in this Agreement.”

(2) Clause 1 states that: “the Parties hereby agree that on signature by the parties, this Agreement shall immediately be fully and effectively binding on them”

(3) Clause 2 states that: “The Parties have settled the Proceedings subject to any on the terms of this Agreement….”

10.  The parties continued to negotiate on the contents of the draft agreement by letters and emails, all of which were marked “subject to contract”.

11.  On 30 September 2015, SPB sent an email marked “Without Prejudice Save as to Costs.  Subject to Contract”, informing MSJL that the plaintiff had decided to accept settlement only if the 10^th defendant is prepared to make full refund (ie US$269,500) and enclosed a revised draft agreement with the settlement sum changed to US$269,500.

12.  Following the protest by MSJL on 12 October 2015, SPB responded on the same day in this way:

“The settlement discussions as between our respective clients have always been ‘subject to contract’ and, as such, a full and final settlement will only be reached upon the parties signing a legally binding settlement agreement containing all agreed terms and conditions in relation to the intended settlement. Our letter dated 20 August 2015 is clearly marked ‘Subject to Contract’ and is not a binding offer.”

Discussion

13.  There are the main two issues between the parties.  I shall deal with the procedural issue first.

14.  Mr Ernest Ng, counsel for the plaintiff, submits that the Summons is defective as it was issued under Order 21 rule 3 of the Rules of the High Court which does not permit a defendant to seek a discontinuance of an action or a claim.  Nor does it permit a defendant to seek what is in effect an order for specific performance of the Settlement Agreement.  Mr Chase Pun, counsel for the 10^th defendant, seems to accept that the application should not have been made under Order 21 rule 3, but submits that the plaintiff would not have any misunderstanding on the nature of the application as §§1‑2 of the Summons expressly referred to variation of the Injunction and a discontinuance of the action. 

15.  In my view, Order 21 rule 3 can only be invoked by a party who has made a claim or counterclaim to discontinue or withdraw his claim or counterclaim.  This is clear from the wording of Order 21 rule 3, which provides that except as provided by rule 2, a party seeking to discontinue an action or counterclaim or withdraw any particular claim made by him is required to apply for leave of the court, whereupon the court may order the action or counterclaim to be discontinued, or any particular claim made therein to be struck out, as against any or all of the parties on terms.

16.  In the present case, only the plaintiff has made a claim against the 10^th defendant and can seek to discontinue or withdraw such claim under Order 21 rule 3. The 10^th defendant cannot seek an order to require the plaintiff to discontinue its claim under Order 21 rule 3.

17.  Mr Ng submits that as the Summons was only issued under Order 21 rule 3 and, in the absence of an application to amend the Summons, it is defective and should be dismissed.  While it is correct that the margin of the Summons did not refer to the relevant rules governing application for variation of the Injunction or dismissal of the action, I do not think it is right to ignore the terms of the order sought in the Summons, which make it clear that the 10^th defendant is seeking to vary the Injunction and to have the action be “discontinued” against it.  Indeed, the plaintiff was well aware of the nature of the application and has filed affirmations to oppose the Summons on the basis that there was no binding agreement between the parties.

18.  I now turn to the substantive issue. In her 10^th affirmation, Ms Leung claims that that no binding agreement was reached between the plaintiff and the 10^th defendant for the following reasons:

(1) the words “subject to contract” in 20/8/2015 Letter, in the context of settling a litigation, “means that a full and final settlement would only be reached between parties upon the signing of a legally binding settlement agreement, containing all the agreed terms and conditions of an intended settlement”; and

(2) “it has been the clear intention of the parties (as can be seen from the correspondence deposed to hereinabove) that the execution of a written agreement is a condition or term of the settlement arrangement and not just mere expression of the desire of the parties as to the manner in which the arrangement already agreed to would be implemented”.

19.  Accordingly, the issue between the parties is whether by the 20/8/2015 Letter the plaintiff was making an offer which intended to be rendered contractual by acceptance, such that the 25/8/2015 Letter could constitute acceptance.

20.  The applicable principles are not really in dispute.  

21.  In considering whether an agreement has been concluded, it is legitimate to look at the whole correspondence including subsequent letters.  The principles were stated by Sir John Pennycuick in Bushwall Properties v Vortex Ltd [1976] 1 WLR 591 at 603G‑604B in this way:

“Mr Dillon took the point that where a contract is alleged to have been constituted by correspondence it is legitimate to look at the whole correspondence including subsequent letters, in order to determine whether by these letters alleged to constitute the contract the parties really intended at that stage to make themselves contractually liable. That principle is well established: see Hussey v. Horne‑Payne (1879) 4 App. Cas. 311…. So, Mr. Dillion says, when you read all of those letters up to and including the letter of August 6, then the proper conclusion is that the two letters of June 5 and 12 should not be held to be contractual in intention. I find it impossible to accept that contention. It seems to me that upon a proper reading of the two letters, whatever their construction may be, it is perfectly clear that by the letter of June 5 Linklaters & Paines were making an offer intended to be rendered contractual by acceptance, and that by the letter of June 12 Coffin, Mew & Clover intended to make that offer contractual by their acceptance.” (emphasis added)

22.  It is not permissible to take into account subsequent conduct of the parties as an aid in construing the contract or in determining whether an inference can be drawn as to their intention when they entered into the contract unless such conduct may give rise to an estoppel (James Miller v Whitworth Street Estates [1970] AC 572 at 603D‑E, 606E‑F, 611D‑E, 615A).

23.  The facts identified during without prejudice negotiations which lead to a settlement agreement of the dispute between the parties are admissible in evidence in order to ascertain the true construction of the agreement as part of its factual matrix or surrounding circumstances (Oceanbulk Shipping and Trading SA v TMT Asia Ltd [2011] 1 AC 662 at §§30, 36, 46‑47). 

24.  Where the documents relied on as constituting a contract contemplate the execution of a further contract, it is a matter of construction of the documents whether a binding contract has been made.  In Von Hatzfeldt‑Wildenburg v Alexander [1912] 1 Ch 284 at 288‑289, Parker J said:

“It appears to be well settled by the authorities that if the documents or letters relied on as constituting a contract contemplate the execution of a further contract between the parties, it is a question of construction whether the execution of the further contract is a condition or term of the bargain or whether it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through. In the former case there is no enforceable contract either because the condition is unfulfilled or because the law does not recognize a contract to enter into a contract. In the latter case there is a binding contract and the reference to the more formal document may be ignored. The fact that the reference to the more formal document is in words which according to their natural construction import a condition is generally if not invariably conclusive against the reference being treated as the expression of a mere desire.” (emphasis added)

25.  The above principles accord with the general principles summarised by Lloyd LJ in Pagnan S.p.A. v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 at 619, as follows:

“(1) In order to determine whether a contract has been concluded in the course of correspondence, one must first look to the correspondence as a whole (see Hussey v Horne‑Payne).

(2) Even if the parties have reached agreement on all the terms of the proposed contract, nevertheless they may intend that the contract shall not become binding until some further condition has been fulfilled. That is the ordinary ‘subject to contract’ case.

(3) Alternatively, they may intend that the contract shall not become binding until some further term or terms have been agreed….

(4) Conversely, the parties may intend to be bound forthwith even though there are further terms still to be agreed or some further formality to be fulfilled (see Love and Stewart v. Instone per Lord Loreburn at p.476).

(5) If the parties fail to reach agreement on such further terms, the existing contract is not invalidated unless the failure to reach agreement on such further terms renders the contract as a whole unworkable or void for uncertainty.

(6) It is sometimes said that the parties must agree on essential terms and it is only matters of detail which can be left over. This may be misleading, since the word ‘essential’ in that context is ambiguous. If by ‘essential’ one means a term without which the contract cannot be enforced then the statement is true: the law cannot enforce an incomplete contract. If by ‘essential’ one means a term which the parties have agreed to be essential for the formation of a binding contract, then the statement is tautologous. If by ‘essential’ one means only a term which the court regards as important as opposed to a term which the court regards as less important or a matter of detail, the statement is untrue. It is for the parties to decide whether they wish to be bound and if so, by what terms, whether important or unimportant…..” (emphasis added)

26.  The principles in Pagnan were approved by the Supreme Court in RTS Flexible Systems Ltd v Molkerei Alois Müller Gmbh & Co KG (UK production) [2010] 1 WLR 753 at §§47‑49.

27.  Mr Pun submits that the fact that the parties have yet to agree on a clause does not prevent the formation of a binding contract, relying on the following statement of Denning LJ in Nicolene Ld v Simmonds [1953] 1 QB 543 at 551:

“In my opinion a distinction must be drawn between a clause which is meaningless and a clause which is yet to be agreed. A clause which is meaningless can often be ignored, whilst still leaving the contract good; whereas a clause which has yet to be agreed may mean that there is no contract at all, because the parties have not agreed on all the essential terms.” (emphasis added)

28.  Mr Ng on the other hand submits that once a party makes an offer which is “subject to contract”, it has a “high hurdle to cross” as the law is that stated in Lewison, The Interpretation of Contracts, 5^th ed, §16.03:

“Save in exceptional circumstances, an arrangement made subject to contract means that execution of a formal contract is a condition precedent to any legal liability”

29.  I do not think that the position is as clear as Mr Ng contends as the learned editor in Lewison goes on to say in §16.03 that the mere fact that the parties contemplate the preparation of a formal contract will not necessarily prevent a binding agreement from coming into effect.  It is a question of construction whether the parties finally agreed to be bound by the terms, though they were subsequently to have a formal agreement drawn up, citing Rossiter v Miller (1878) 3 App Cas 1124 and Von Hatzfeldt‑Wildenburg v Alexander.

30.  Mr Ng further submits that the present case falls within class (2) of Pagnan.  The usual effect of the phrase “subject to contract”, says Mr Ng, is that there be no legally enforceable contract until a formal document is executed and, “in the event of no contract being entered into any resultant loss should lie where it fell” (Regalian Properties Plc v London Docklands Development Corp [1995] 1 WLR 212 at 231A‑C; Winn v Bull (1877) 7 Ch D 29 at 32).  Winn v Bull was recently applied in Raymond Bieber and Ors v Teathers Ltd (in liq) [2014] EWHC 4205 (Ch)(at §14(iv)) where the claimants sought a declaration that the parties reached a binding settlement of the proceedings by an exchange of emails between solicitors and the solicitors who had conduct of the proceedings gave oral evidence at trial. 

31.  Mr Pun submits that a binding Settlement Agreement was reached on 25 August 2015 for the following reasons:

(1) The 20/8/2015 Letter was a settlement offer, as the latter part of the letter described the proposed terms of settlement as “the above settlement offer” which, if not agreed within the stipulated time, would “automatically lapse”.

(2) Although the 20/8/2015 Letter was marked “subject to contract”, there was nothing to suggest that any agreement had to be reduced into writing before it would be binding.

(3) The phrase “subject to contract” did not mean that the execution of a further contract is a condition or term of the Settlement Agreement, but a mere expression of the plaintiff’s desire as to the manner in which the settlement would be implemented.  The reference to a more formal contract can be ignored, as in Von Hatzfeldt‑Wildenburg v Alexander.

(4) The 10^th defendant was entitled to and did accept the offer in the 25/8/2015 Letter.

(5) The plaintiff acknowledged in recital (D) of the draft agreement that the parties had “agreed terms for the full and final settlement of the Proceedings”.  

(6) There was a complete agreement with sufficiently certain terms to constitute a contract.  Whether the agreed sum should be transferred to SPB within three or five days after the Injunction has been discharged is not an essential term of the Settlement Agreement.  There was nothing important yet to be agreed.

32.  Mr Ng on the other hand submits that there was no binding Settlement Agreement between the parties because:

(1) the suggestion that the 20/8/2015 Letter constituted a binding offer is contrary to the “accepted usage” and meaning of “subject to contract” as shown by the authorities and “defeats the whole purpose of ‘subject to contract’ negotiation”;

(2) Von Hatzfeldt‑Wildenburg v Alexander is not a “subject to contract” case but a “subject to solicitor approval” case.  Likewise, Nicolene is not a case of “subject to usual conditions of acceptance” case.  The facts of these case are very different from the present case.

(3) In law, to displace the effect of the “subject to contract” clause, there must be a waiver of the clause.  The court must approach the question with care and it must be the “only reasonable inference” that can be drawn (RTS Flexible Systems, §§55, 86‑87).  As can be seen from the correspondence, there was no waiver on the part of the plaintiff as all the letters sent by SPB to MSJL including the 20/8/2015 Letter were marked “subject to contract”.

(4) The suggestion in Mr Cheng’s affirmation that the correspondence subsequent to the 25/8/2015 Letter were only for “implementation” of the Settlement Agreement is an invention as the same did not appear in any of the correspondence between the parties.

(5) The words “to record those terms of settlement, on a binding basis, in this Agreement” in recital (D) of the draft agreement shows that the parties never intended to have a full and final settlement of this action without a written agreement.  The fact that the parties intended that they would only be bound upon execution of the draft agreement is also reflected in clauses 1, 2 and 5 of the draft agreement.  

(6) The order sought in §§1‑3 of the Summons, which require the Injunction be discharged, the action be “discontinued” and there be no order as to costs of the action are “material terms” for a full and final settlement but the parties have never agreed on such terms.  In addition, although the parties have agreed on the settlement sum, they have not agreed on (i) the payment method, (ii) the time for payment and (iii) the form of solicitor undertaking in the event of default. In the absence of an agreement on these material terms, the Settlement Agreement lacks certainty.  

33.  The dispute on the intention of the plaintiff in making the offer in 20/8/2015 Letter and the parties’ understanding of the meaning of the phrase “subject to contract” are issues which cannot be resolved by the court on the basis of the conflicting affirmations filed by the respective solicitors.  Further, in light of the extent of the competing contentions now advanced by the parties (as summarised in §§31‑32 above), which involve mixed questions of law and fact, it is necessary for the parties to articulate their cases in pleadings so that the issues can be properly identified as the action proceeds further.   

34.  As the court is unable to hold, at this stage, that there was a binding Settlement Agreement made between the plaintiff and the 10^th defendant, the 10^th defendant is not entitled to the order sought in §§2‑3 of the Summons and the same is dismissed.

35.  In §1(i) of the Summons, the 10^th defendant seeks a variation of the Injunction to permit it to pay a sum of US$134,750 out of its bank account at HSBC to the plaintiff’s solicitors as settlement sum.  At the hearing, Mr Pun confirms that the sum of US$269,500 has been frozen in the 10^th defendant’s bank account at HSBC and that if the court is unable, at this stage, to conclude that a binding Settlement Agreement was reached between the parties, the 10^th defendant is still willing to pay a sum of US$134,750 to the plaintiff’s solicitors and to deposit the other US$134,750 into court pending determination of this action.  Upon payment of these sums, the Injunction should be discharged.  Mr Ng does not object to the payments or the discharge of the Injunction upon the payments having been effected in the manner described above.  Accordingly, I make an order along the following lines:

(1) the Injunction against the 10^th defendant be varied for the purpose of allowing the 10^th defendant to pay (i) US$134,750 to the plaintiff’s solicitors and (ii) US$134,750 into court;

(2) upon the written confirmation of the plaintiff’s solicitors given to the court that the 10^th defendant has made the payments described in sub‑paragraph (1) above, the Injunction against the 10^th defendant be discharged; and

(3) there be liberty to apply for the purpose of effecting the payments and the discharge of the Injunction under §§(1) and (2) above.

36.  The parties shall submit a draft order embodying the terms set out in §35 above for the court’s approval.  

37.  As for costs, as observed at the hearing, the 2^nd affirmation of Juan Velez dated 29 December 2015 is irrelevant to the Summons as it is common ground that all negotiations and correspondence relevant to the Settlement Agreement were conducted by SPB on behalf of the plaintiff.  This is reinforced by the fact that Mr Ng has not referred to any part of the 2^nd affirmation of Juan Velez in his submissions.  Likewise, the affirmation and 2^nd affirmation of Leung Ka Ying dated 5 March 2015 and 26 May 2015 respectively are irrelevant to the Summons but are included in the bundles at the insistence of SPB.  The plaintiff should not be entitled to recover the costs unnecessarily incurred and, accordingly, I disallow the costs of and occasioned by (1) the preparation of 2^nd affirmation of Juan Velez and (2) the inclusion of the affirmation and 2^nd affirmation of Leung Ka Ying in the hearing bundles.

38.  Subject to disallowing the costs identified in §37 above, I make a costs order nisi that 50% of the costs of and occasioned by the Summons be costs in the cause and the other 50% of the costs shall be paid by the 10^th defendant to the plaintiff, to be taxed if not agreed.